India’s AIF Industry Celebrates Landmark Tax Clarity in Budget 2025: Key Amendments Explained

Mumbai – In a historic move for India’s private equity (PE) and venture capital (VC) ecosystem, Finance Minister Nirmala Sitharaman announced pivotal amendments to the Income Tax Act during the Union Budget 2025. After a decade of persistent advocacy by industry stakeholders, Section 2(14)of the Act has been revised to classify investments by Category I and II Alternative Investment Funds (AIFs) as “capital assets,” ensuring their income is taxed as  capital gains  and not business income.

Tax Clarity for AIFs: A ₹5 Trillion Industry Boost

The amendment addresses long-standing ambiguity around the tax treatment of AIF income. With over  1,400 AIFs  managing a staggering  ₹5 trillion  (as of September 2024, per SEBI data), the clarification brings much-needed certainty to fund managers and investors.

Key Highlights of the Amendment:

• Capital Gains vs. Business Income:  Income from the transfer of securities by AIFs will now be  taxed as capital gains  (12.5% for long-term gains) instead of business income (up to 30%).
• Carried Interest Clarity:  Returns earned by fund managers (via carried interest) will also qualify as capital gains, aligning India’s regime with global standards.
• Parity with FPIs:  The move brings AIFs on par with  Foreign Portfolio Investors (FPIs) , which secured similar tax treatment in 2014.
• Why This Matters for India’s Startup and Investment Ecosystem  ?

AIFs, which pool capital from institutional and high-net-worth investors to back early-stage and growth-focused companies, have emerged as critical drivers of India’s innovation economy. Siddharth Pai, Founding Partner of 3one4 Capital, hailed the amendment: “This ensures tax certainty for AIFs, mirroring the FPI framework. It’s a win for domestic funds and startups alike.”*

Industry Reactions:

• Ritesh Kumar (Partner, BDO):  “The amendment resolves years of uncertainty. Gains from portfolio exits will now be treated as capital gains, streamlining taxation for fund managers.”
• Sanjay Sanghvi (Partner, Khaitan & Co.):  “The ‘pass-through’ mechanism for Category I/II AIFs ensures consistency with FIIs. However, applicability for prior years may need clarification.”

Budget 2025: TCS Relief and ₹10,000 Cr Fund Boost

The Budget also delivered two additional wins for AIFs:

1. No TCS on Securities Sales: Section 206C(1H) has been scrapped from April 2025, exempting AIFs from  Tax Collected at Source (TCS)  on securities transactions.
2. Fund of Funds (FoF) Expansion: The government allocated  ₹10,000 crore  to replenish its FoF pool, which has already committed ₹10,913 crore to 141 AIFs (as of September 2024). These AIFs have deployed ₹19,992 crore into  1,120 startups , per SIDBI data.

The Road Ahead: Stability for Investors and Startups

By resolving tax ambiguities and reducing compliance burdens, the amendments are expected to:

– Boost investor confidence in domestic AIFs.

– Encourage higher allocations to Indian startups and infrastructure projects.

– Strengthen India’s position as a global investment destination

Looking Ahead: Challenges and Opportunities

Challenges

While the amendments resolve critical tax ambiguities, challenges remain:

• Retrospective Application: Clarity is needed on whether the amendments apply to transactions before FY 2025-26.
• State-Level Compliance: Ensuring uniform interpretation across tax authorities will be key to avoiding disputes.

Opportunities: 

• Global Investor Appeal: Clearer tax frameworks could attract foreign capital to Indian AIFs.
• Sectoral Growth:Deep-tech, climate-tech, and agri-tech startups are likely to see increased funding.

Conclusion: A New Era for Indian AIFs

The Budget 2025 reforms mark a turning point for India’s $60 billion+ AIF industry. By eliminating tax uncertainties, reducing compliance burdens, and amplifying government support, the amendments empower AIFs to drive sustainable economic growth. As Siddharth Pai notes, This is not just a tax fix – it’s a signal that India is ready to back its homegrown funds and innovators.

For investors, startups, and policymakers alike, the message is clear: India’s alternative investment ecosystem is poised for takeoff.

Call to Action:

Stay updated with the latest in India’s startup and investment landscape! [Subscribe to our newsletter] for expert insights on tax reforms, fundraising trends, and policy updates.

Frequently Asked Questions (FAQs)

Q1: What is the significance of classifying AIF investments as “capital assets”?

A: This classification ensures that income from securities transactions by AIFs is taxed as capital gains (12.5% for long-term) instead of business income (up to 30%), reducing tax liabilities and boosting investor returns.

Q2: How does the amendment impact carried interest for fund managers?

A: Carried interest, which represents fund managers’ share of profits, will now be taxed as capital gains rather than business income, aligning India’s regime with global standards and incentivizing fund managers.

Q3: What does the TCS exemption mean for AIFs?

A: The removal of TCS (Tax Collected at Source) on securities sales simplifies compliance and reduces cash-flow blockages for AIFs, making transactions more efficient.

Q4: How will the ₹10,000 crore FoF allocation benefit startups?**

A: The FoF acts as an anchor investor, enabling AIFs to raise larger pools of capital. This trickles down to startups, fueling innovation and job creation across sectors like tech, healthcare, and green energy.

Navigating the New SEBI Regulations for Alternative Investment Funds (AIFs)

Sebi Eases Borrowing Rules for AIFs to Address Drawdown Shortfalls

Revamping RBI and SEBI’s Policy on Overseas Investment for AIFs

#AIF #Budget2025 #CapitalGainsTax #StartupIndia #VentureCapital #TaxReforms  #AIF #Budget2025 #CapitalGainsTax #StartupIndia #VentureCapital #TaxReforms